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In the past month or so, the window to lock in ultra-cheap mortgage interest rates for the next few years may well have closed, as more banks have jacked up fixed rates.

But how many people do you think got their timing right, and managed to exploit the chance to guarantee cut-price loan repayments?

If history is any guide, very few will be patting themselves on the back for fixing at the right time.

Less than one in seven home loans issued in the past six months have been fixed-rates, official figures show, even though these have been the lowest rates on record. Brokers say this share is now ticking up marginally.

Yet when interest rates do inevitably rise, it’s likely more of us will belatedly think about fixing the mortgage, as has occurred in previous interest rate cycles. It’s just that by then, fixing will be more expensive.

The record for the highest proportion of borrowers fixing their loans, of more than 25 per cent, was in March 2008. Borrowers weren’t to know it at the time, but in hindsight that was a terrible time to fix, because the cash rate was at a 12-year high 7.5 per cent, only to be slashed to 3 per cent over the next year in response to the global financial crisis.


So, why do few of us fix their mortgages at precisely the right time, while a sizeable chunk will lock in interest rates when they are higher?

Aside from the fact that it is very hard to pick a turning point in any market – that’s just life – I think there’s a deeper psychological reason why relatively few took the chance to lock in ultra-cheap debt.

Psychologists have found evidence most of us dislike missing out on a bargain more than we enjoy an equivalent gain. It’s known as loss aversion – the idea that we are more annoyed about losing $50 than we are happy about getting a $50 windfall.

The principle applies equally in the mortgage market. When fixed loans are being advertised at just 3.5 per cent, many of us probably thought variable loans might get even cheaper (often because the media and people in the financial markets predicted they would).

“I think it’s human psychology, I want to chase the absolute cheapest, and I’d feel more peeved about missing the cheapest than having to pay a little bit more,” says Mortgage Choice chief John Flavell.

Now, the financial markets have abruptly changed their minds on the outlook for interest rates, and this has made fixing more expensive.

Five-year loans have gone up the most, by about 0.6 percentage points. The fact they have gone up this much means they may still look unattractive, until variable interest rates are significantly higher. But by this time, the cost of taking out a fixed loan will have gone up by even more.

The lesson?

Most of us, including many experts, struggle to fix turning points in financial markets, and that’s probably not going to change. But “loss aversion” makes it even harder in the this particular market.

The advice from financial planners is that fixing a mortgage shouldn’t be about bargain-hunting, but managing your cashflow and providing certainty.

If you like the idea of knowing what your repayments are going to be, or if money is tight, it can make sense to fix the portion of the loan that you’re unlikely to pay off. Given how hard it is to get the timing right, it is common for people in this position to only fix part of the loan, not the whole thing.


Posted by Clancy Yeates – The Age on 13th December, 2016